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The Norwegian government’s sovereign wealth fund, which owns part of almost every listed company in the world, is considering selling out of its investments in carbon-intensive firms.

Given that the $840 billion fund, the world’s largest, invests the proceeds from the country’s oil and gas industry, this would be a stunning move. But the Norwegian Government Pension Fund does not have to look far for sound business reasons to take this step.

Environmental groups such as Carbon Tracker, 350.org and the Asset Owners Disclosure Project would hail any move to reduce Norway’s fuel exposure as a significant victory in their campaign to persuade investors to sell their high-carbon investments. They say that there is a “carbon bubble” that means fossil fuel companies are overvalued by the market because much of the implied value is in carbon-intensive assets that the companies will be unable to exploit because of the growing level of regulation to limit greenhouse gas emissions.

As if to prove the point, last week Globe International released a report outlining the climate laws of 66 countries responsible for more than 80% of emissions.

This argument is bolstered by comments from the International Energy Agency that to meet international targets to limit average temperature rises to 2⁰C, two thirds of known fossil fuel reserves need to stay in the ground. This stance has been backed up by the UK Parliament’s Environmental Audit Committee, which has warned of the danger of carbon assets becoming stranded as the world works towards a global deal to limit GHG emissions in 2015.

“The UK Government and Bank of England must not be complacent about the risks of carbon exposure in the world economy,” said the Committee’s chair, Joan Walley MP. “Financial stability could be threatened if shares in fossil fuel companies turn out to be overvalued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilising the climate,” she said.

This is a particular danger for the UK because the London markets have become more carbon intensive in recent years as more miners and oil groups have listed. According to clean technology investor WHEB Asset Management, the London Stock Exchange is now the second most carbon intensive market in the world after Moscow.

There is also a danger that these assets will become worthless simply because they are usurped by renewable energy and energy efficiency technologies, a possibility starkly illustrated by last week’s almost €5 billion (nearly $7 billion) writedown by RWE, the German utility, as it reported its first loss – of €2.8 billion ($3.9 billion) – since the company was formed almost sixty years ago.

The company’s chief executive Peter Terium said that the writedowns reflect the fact that its fossil fuel assets just aren’t going to earn what the company believed they would. He admitted that RWE had pursued the wrong strategy, focusing too much on its coal and gas assets and not enough on renewables.

“In the coming years, our power plants will earn even less than feared. We had to account for that in our annual results,” Terium told investors, adding that the rise of renewable energy technologies such as wind and solar is “unstoppable” and the company made mistakes by getting into renewable energy too late.

It is not alone – German utilities are responsible for just 7% of the country’s renewable energy installations, which make up 25% of its generating capacity and have revolutionised the electricity market by taking much of the lucrative market for peak time electricity from conventional generating assets. Continuing falls in the cost of renewable technologies and advances in energy efficiency, the smart grid and energy storage will continue this trend.

There are also a number of financing organisations such as the UK’s Green Investment Bank and New York’s Green Bank that would be happy to invest the fund’s money in low-carbon technologies, while the nascent green bonds market is growing rapidly and would welcome Norway’s involvement.

Because the fund’s remit is to invest in a way that benefits future generations rather than provide returns in the short term, it can take a longer view of its returns than most investors and there is no reason why it can’t focus some of its resources on cutting the costs of renewables. Indeed, Prime Minister Erna Solberg has just announced that it will do exactly that, with full details to be announced in April. As environmental NGO WWF says, it is rare that one government alone can bend the curve of climate change, but because of the size of its SWF, Norway can.